February 27, 2017 Nelnet Reports Fourth Quarter 2016 Results - GAAP net income $2.32 per share, $1.05 per share excluding adjustments - 10 percent increase in student loan servicing volume to $195 billion - 11 percent increase in Tuition Payment Processing and Campus Commerce revenue LINCOLN, Neb., Feb. 27, 2017 /PRNewswire/ -- Nelnet (NYSE: NNI) today reported GAAP net income of $98.3 million, or $2.32 per share, for the fourth quarter of 2016, compared with GAAP net income of $83.4 million, or $1.86 per share, for the same period a year ago. Net income, excluding derivative market value and foreign currency adjustments, was $44.5 million, or $1.05 per share, for the fourth quarter of 2016, compared with $59.0 million, or $1.31 per share, for the same period in 2015. For additional information on these non-gaap metrics, including reconciliations to GAAP net income, see "Non-GAAP Performance Measures" below. The decrease in net income, excluding derivative market value and foreign currency adjustments, for the fourth quarter of 2016, compared with the same period in 2015, was expected due to the runoff of the company's student loan portfolio and lower student loan spread, which decreased net interest income. In addition, during the fourth quarter of 2016, the company redeemed certain debt securities prior to their legal maturity and recognized $7.4 million, or $0.11 per share after tax, in interest expense to write off the remaining debt discount associated with these bonds. "It was another solid year for Nelnet in 2016. We generated strong earnings from operations and our student loan portfolio, while also achieving further diversification," said Jeff Noordhoek, chief executive officer of Nelnet. "Our core fee-based businesses, payment processing and student loan servicing, grew, and we invested significant capital with the addition of our ALLO fiber-optic communications business." Nelnet operates four primary business segments, earning interest income on student loans in its Asset Generation and Management segment, and fee-based revenue in its Loan Systems and Servicing, Tuition Payment Processing and Campus Commerce, and Communications segments. Asset Generation and Management For the fourth quarter of 2016, Nelnet reported net interest income of $79.0 million, compared with $112.2 million for the same period a year ago. The company's average balance of student loans decreased to $25.5 billion for the fourth quarter of 2016, compared with $28.9 billion for the same period in 2015. As a result of a widening in the basis between the indices in which the company earns interest on its loans and funds such loans and a decrease in fixed rate floor income as a result of an increase in interest rates, core student loan spread decreased to 1.24 percent for the fourth quarter of 2016, compared with 1.45 percent for the same period in 2015. Net interest income included $38.3 million and $52.8 million of fixed rate floor income in the fourth quarter of 2016 and 2015, respectively. Loan Systems and Servicing Revenue from the Loan Systems and Servicing segment was $53.8 million for the fourth quarter of 2016, compared with $56.7 million for the same period in 2015. During the fourth quarter of 2016, the company had no guaranty servicing and collection revenue. The company's guaranty servicing and collection revenue previously came from two guaranty servicing clients, but one contract expired on October 31, 2015, and the other client exited the guaranty business at the end of its contract term on June 30, 2016. Revenue from these clients was $9.6 million for the fourth quarter of 2015. As of 2016, the company was servicing $162.5 billion of loans for the U.S. Department of Education (Department), compared with $147.3 billion of loans as of 2015. Revenue from this contract increased 16
percent to $39.3 million for the fourth quarter of 2016, up from $33.9 million for the same period a year ago. The growth in government servicing revenue partially offset the loss of guaranty servicing and collection revenue. In April 2016, the Department's Office of Federal Student Aid released information regarding a new contract procurement process for the Department to acquire a single servicing system platform with multiple customer service providers to manage all federal student loans owned by the Department. The contract solicitation process is divided into two phases. On May 6, 2016, the company and Great Lakes Educational Loan Services, Inc. (Great Lakes) submitted a joint response to Phase I as part of a newly created joint venture to respond to the contract solicitation process and to provide services under the new contract if awarded the contract by the Department. The joint venture operates as a new legal entity called GreatNet Solutions, LLC (GreatNet). The company and Great Lakes each own 50 percent of the ownership interests of GreatNet. In addition to the company, Great Lakes is one of four private sector companies (referred to as Title IV Additional Servicers, or TIVAS) that currently has a student loan servicing contract with the Department to provide servicing for loans owned by the Department. On June 30, 2016, the Department announced that GreatNet and the two other TIVAS were selected to respond to Phase II of the procurement selection process. On January 6, 2017, GreatNet submitted its Phase II response to the Department and is currently awaiting announcement from the new administration on the next steps in the procurement process. Tuition Payment Processing and Campus Commerce For the fourth quarter of 2016, revenue from the Tuition Payment Processing and Campus Commerce segment was $30.5 million, an increase of $3.0 million, or 11 percent, from the same period in 2015. The increase in revenue was primarily driven by growth in managed tuition payment plans, transaction and payments volume, and new school customers. This operating segment serves more than 10 million students and families at nearly 13,500 K-12 schools and 970 colleges and universities. Communications In March 2016, ALLO Communications began the build-out of its fiber optic network in Lincoln, Nebraska, resulting in capital expenditures of $38.8 million in 2016, including $14.2 million for the fourth quarter. The company anticipates total network capital expenditures of approximately $80 million in 2017; however, the amount of capital expenditures could change based on customer demand for ALLO's services. For the fourth quarter of 2016, ALLO recognized a net loss of $2.6 million. The company anticipates this operating segment will be dilutive to consolidated earnings over the next several years as it continues to build its network in Lincoln, Nebraska, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs. ALLO's management uses earnings before interest, income taxes, depreciation, and amortization (EBITDA) to eliminate certain noncash and non-operating items in order to consistently measure performance from period to period. For the fourth quarter of 2016, ALLO had negative EBITDA of $1.7 million. For additional information on this non-gaap metric, including a reconciliation to ALLO's GAAP net loss, see "Non-GAAP Performance Measures" below. Liquidity and Capital Activities For the year ended 2016, the company generated $325.3 million in net cash provided by operating activities. As of 2016, the company had cash and cash equivalents of $69.7 million. In addition, the company had a portfolio of available-for-sale and trading investments, consisting primarily of student loan asset-backed securities, with a fair value of $106.6 million as of 2016. The company intends to use its liquidity position to capitalize on market opportunities, including student loan acquisitions; strategic acquisitions and investments; expansion of ALLO's telecommunications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the company's cash and investment balances. During 2016, the company repurchased a total of 2,038,368 shares of Class A common stock for $69.1 million ($33.90 per share), including 225,776 shares of Class A common stock purchased during the fourth quarter of 2016 for $8.9 million ($39.63 per share). Weighted average common shares outstanding for the fourth quarter of 2016 was 42.3 million, compared with 44.8 million for the same period in 2015. On January 23, 2017, the company initiated a cash tender offer to purchase its outstanding unsecured hybrid securities. In February 2017, the company paid $24.6 million to redeem $29.2 million in aggregate principal amount of notes. After the completion of this tender offer, the company has $21.0 million of hybrid securities that remain outstanding.
Year-End Results GAAP net income for the year ended 2016 was $256.8 million, or $6.02 per share, compared with GAAP net income of $268.0 million, or $5.89 per share, for 2015. Net income, excluding derivative market value and foreign currency adjustments, in 2016 was $212.3 million, or $4.97 per share, compared with $250.2 million, or $5.50 per share, for 2015. For additional information on these non-gaap metrics, including reconciliations to GAAP net income, see "Non-GAAP Performance Measures" below. Non-GAAP Performance Measures A reconciliation of the company's GAAP net income to net income, excluding derivative market value and foreign currency adjustments, is provided below. Three months ended Year ended 2016 2015 2016 2015 (dollars in thousands, except share data) GAAP net income attributable to Nelnet, Inc. $ 98,346 83,350 256,751 267,979 Derivative market value and foreign currency adjustments (86,844) (39,350) (71,744) (28,651) Tax effect 33,001 14,953 27,263 10,887 Net income, excluding derivative market value and foreign currency adjustments $ 44,503 58,953 212,270 250,215 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 2.32 1.86 6.02 5.89 Derivative market value and foreign currency adjustments (2.05) (0.88) (1.68) (0.63) Tax effect 0.78 0.33 0.63 0.24 Net income, excluding derivative market value and foreign currency adjustments $ 1.05 1.31 4.97 5.50 The company provides additional non-gaap financial information related to specific items management believes to be important in the evaluation of its operating results and performance, including specifically, the impact of unrealized gains and losses resulting from changes in fair values of derivative instruments that do not qualify for "hedge treatment" under GAAP and foreign currency transaction gains or losses resulting from the re-measurement of the company's Eurodenominated bonds to U.S. dollars. The company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the company's management utilizes operating results excluding these items for comparability purposes when making decisions regarding the company's performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the company reports this non-gaap information because the company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-gaap information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. The tax effects of the derivative market value and foreign currency adjustments are calculated by multiplying those adjustments by the applicable statutory income tax rate. A reconciliation of ALLO's GAAP net loss to earnings (loss) before net interest, income taxes, depreciation, and amortization (EBITDA), is provided below. Three months ended 2016 (dollars in thousands) Net loss $ (2,599) Net interest expense 600 Income tax benefit (1,593) Depreciation and amortization 1,923 Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) $ (1,669)
EBITDA is a supplemental non-gaap performance measure that is frequently used in capital-intensive industries such as telecommunications. ALLO's management uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The company reports EBITDA for ALLO because the company believes that it provides useful additional information for investors regarding a key metric used by management to assess ALLO's performance. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from ALLO's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP. Forward-Looking and Cautionary Statements This press release contains forward-looking statements within the meaning of federal securities laws. These statements are based on management's current expectations as of the date of this release and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, but are not limited to: risks related to the company's student loan portfolio, such as interest rate basis and repricing risk and changes in levels of student loan repayment or default rates; the use of derivatives to manage exposure to interest rate fluctuations; the uncertain nature of expected benefits from Federal Family Education Loan Program (FFELP) and private education loan purchases and initiatives to purchase additional FFELP and private education loans; financing and liquidity risks, including risks of changes in the securitization and other financing markets for student loans; risks related to adverse changes in the company's volumes under the company's loan servicing contract with the Department to service federally owned student loans; risks related to the Department's initiative to procure a new contract for federal student loan servicing to acquire a single servicing platform to service all loans owned by the Department, including the risk that the company's joint venture with Great Lakes may not be awarded the contract; risks and uncertainties from changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and the resulting initiatives by the company to adjust to a post-ffelp environment; the uncertain nature of the expected benefits from the acquisition of ALLO and the ability to successfully integrate its communications operations and successfully expand its fiber network in existing service areas and additional communities and manage related construction risks; risks and uncertainties related to initiatives to pursue additional strategic investments and acquisitions, including investments and acquisitions that are intended to diversify the company both within and outside of its historical core education-related businesses; and changes in general economic and credit market conditions. For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company's supplemental financial information for the fourth quarter ended 2016. All forward-looking statements in this release are as of the date of this release. Although the company may voluntarily update or revise its forward-looking statements from time to time to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by securities laws. (code #: nnif) Consolidated Statements of Income (Dollars in thousands, except share data) (unaudited) 2016 Three months ended September 30, 2016 2015 2016 Year ended 2015 Interest income: Loan interest $ 183,505 193,721 190,778 751,280 726,258 Investment interest 2,792 2,460 2,303 9,466 7,851 Total interest income 186,297 196,181 193,081 760,746 734,109 Interest expense: Interest on bonds and notes payable 107,337 96,386 80,866 388,183 302,210 Net interest income 78,960 99,795 112,215 372,563 431,899 Less provision for loan losses 3,000 6,000 3,000 13,500 10,150
Net interest income after provision for loan losses 75,960 93,795 109,215 359,063 421,749 Other income: Loan systems and servicing revenue 53,764 54,350 56,694 214,846 239,858 Tuition payment processing, school information, and campus commerce revenue 30,519 33,071 27,560 132,730 120,365 Communications revenue 4,492 4,343 17,659 Enrollment services revenue 11,279 4,326 51,073 Other income 15,218 15,150 11,587 53,929 47,262 Gain on sale of loans and debt repurchases, net 5,720 2,160 166 7,981 5,153 Derivative market value and foreign currency adjustments, net 86,844 42,262 39,350 71,744 28,651 Derivative settlements, net (3,657) (6,261) (7,715) (21,949) (24,250) Total other income 192,900 145,075 138,921 481,266 468,112 Operating expenses: Salaries and benefits 68,017 63,743 64,862 255,924 247,914 Depreciation and amortization 9,116 8,994 7,203 33,933 26,343 Loan servicing fees 5,726 5,880 7,384 25,750 30,213 Cost to provide communications services 1,697 1,784 6,866 Cost to provide enrollment services 9,190 3,623 41,733 Other expenses 31,245 26,391 28,584 115,419 123,014 Total operating expenses 115,801 106,792 117,223 441,515 469,217 Income before income taxes 153,059 132,078 130,913 398,814 420,644 Income tax expense 54,128 47,715 47,395 141,313 152,380 Net income 98,931 84,363 83,518 257,501 268,264 Net income attributable to noncontrolling interests 585 69 168 750 285 Net income attributable to Nelnet, Inc. $ 98,346 84,294 83,350 256,751 267,979 Earnings per common share: Net income attributable to Nelnet, Inc. shareholders - basic and diluted $ 2.32 1.98 1.86 6.02 5.89 Weighted average common shares outstanding - basic and diluted 42,314,467 42,642,213 44,834,662 42,669,070 45,529,340 Condensed Consolidated Balance Sheets (Dollars in thousands) (unaudited) As of As of As of 2016 September 30, 2016 2015 Assets: Student loans receivable, net $ 24,903,724 25,615,434 28,324,552 Cash, cash equivalents, investments, and notes receivable 323,798 324,682 367,210 Restricted cash 1,100,663 964,379 977,395 Goodwill and intangible assets, net 195,125 198,276 197,062 Other assets 656,798 566,840 552,925 Total assets $ 27,180,108 27,669,611 30,419,144 Liabilities: Bonds and notes payable $ 24,668,490 25,320,878 28,105,921 Other liabilities 440,693 367,637 421,065 Total liabilities 25,109,183 25,688,515 28,526,986 Equity: Total Nelnet, Inc. shareholders' equity 2,061,655 1,972,085 1,884,432 Noncontrolling interests 9,270 9,011 7,726 Total equity 2,070,925 1,981,096 1,892,158 Total liabilities and equity $ 27,180,108 27,669,611 30,419,144 To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/nelnet-reports-fourth-quarter- 2016-results-300414234.html SOURCE Nelnet
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